(Updates with additional comment from Nationwide in eighth paragraph, BOE survey in ninth.)
Jan. 3 (Bloomberg) -- U.K. house prices rose and mortgage lending surged more than forecast as the property market’s momentum continued to build at the end of 2013.
Nationwide Building Society said home values increased 1.4 percent in December, taking their gain last year to 8.4 percent, the biggest annual increase since 2006. Separate reports in London showed mortgage approvals are now at the highest in almost six years and growth in construction is being led by homebuilding.
The housing revival, fueled by an improving economy and government measures, has prompted a response from the Bank of England. It ended incentives on mortgage lending in a credit- boosting program and will focus on corporate credit. The need for such a move was highlighted today by data showing business lending fell the most in at least 18 months in November.
“Surveys consistently show markedly rising buyer interest and strengthening activity so house prices look set to see further strong increases,” said Howard Archer, chief U.K. economist at IHS Global Insight in London. The decision “to end Funding for Lending support for lending to households looks a highly sensible decision, although in itself it is unlikely to act as a major brake on housing market activity.”
In contrast to the increase in home loans, the BOE data showed that business lending fell 4.7 billion pounds ($7.7 billion) in November, the biggest drop since the data series began in May 2011. Lending to manufacturers has fallen 3.1 percent in the past year.
Home-loan approvals rose to 70,758 in November, the most since January 2008, compared with 68,029 in October, the Bank of England said today. The median forecast of 15 economists in a Bloomberg News survey was for 69,700 approvals. Mortgage lending increased 910 million pounds.
“A large part of the pickup in the housing market can be attributed to further improvements in the labor market and the brighter economic outlook,” said Robert Gardner, chief economist at Nationwide. “Policy measures also played an important supporting role.”
Gardner also said “ultra-low” borrowing costs were fueling demand for property.
The BOE’s Monetary Policy Committee has pledged to keep its key interest rate at a record-low 0.5 percent until unemployment, now at 7.4 percent, falls to 7 percent. The MPC will leave the rate unchanged when it announces its next policy decision on Jan. 9, according to a Bloomberg News survey.
Separately today, Markit Economics said its index of construction fell less than economists forecast in December, slipping to 62.1 from 62.6 in November. The median of 14 estimates was for a reading of 62. The gauge has been above the 50 level that divides expansion from contraction since May.
Markit said that commercial construction increased at the fastest pace since August 2007 last month, and residential building remained the fastest growing area of the industry. Civil engineering activity also expanded.
While values posted their strongest monthly gain since August 2009 in December, average U.K. home prices -- at 175,826 pounds -- are about 5 percent below their 2007 peak, according to Nationwide. In a sign of the buoyancy of London’s property market, it said the average value in the capital of 345,186 pounds is about 14 percent above 2007 levels.
Mortgage lender Halifax, part of Lloyds Banking Group Plc, has forecast that home prices will increase between 4 percent and 8 percent in 2014. BOE Governor Mark Carney has said policy makers are monitoring developments after they sought to put a curb on activity in November.
--With assistance from Emma Charlton and Mark Evans in London. Editors: Fergal O’Brien, Craig Stirling